CBA vs ROI (cost benefit analysis vs return on investment)

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** Updated to include a new comparison example between CBA and ROI in the second table below **

A great table and explanation of the difference uses and value of the two forms of measurement for social marketeers, from Angie Schottmuller in Search Engine Watch:

Cost-Based Analysis (CBA) Return on Investment (ROI)
Formula Benefits – Costs ( Benefits – Costs ) / Costs
Example $12,000 B – $1,000 C
= $11,000 CBA
($12,000 B – $1,000 C) / $1,000 C
= 11 or 1100% ROI
Format Dollar Value Percentage or Ratio
Purpose Analyze estimated cost impact. e.g. make a profit, break-even, take a loss. Analyze investment effectiveness for generating a profit.
Focus Profit Investment Return
Common Use Compare options using a common currency and justify bottom-line feasibility of spending. Assess profitability as a basis for continuing and prioritizing future investments.
Answers… Will we come out ahead? How effective were we at coming out ahead? What kind of payback did we get for the investment?

Note: An ROI of 1 or 100% implies you’d get back what you put into it, while CBA, also sometimes known as Cost-Benefit Analysis, has a $0 “break even” point.

Notice how in the examples above, the CBA for two different tactics with very different costs could be the same, while respective ROI sheds further light on the investment effectiveness.

I have added comparison below, to better illustrate how the same CBA for two different sets of figures, but which delivers a different ROI figure, all the better to help guide investment:

COST-BASED ANALYSIS (CBA) RETURN ON INVESTMENT (ROI)
Formula Benefits – Costs ( Benefits – Costs ) / Costs
Example 1  $55,000 B – $44,000 C
= $11,000 CBA
($55,000 B – $44,000 C) / $11,000 C
= 0.25 or 25% ROI
Example 2  $155,000 B – $144,000 C
= $11,000 CBA
($155,000 B – $144,000 C) / $144,000 C
= 0.076 or 7.6% ROI

Anyhow that’s not all from Angie (and me with example #2), in the post there’s also a very helpful section on different calculation formulas which comes with the following presentation including said formulas for social SEO among others:


Finally, KPIs?
And if you found that useful, but for some reason thought, “yes but how does that relate to KPIs?” then I have a one slide example of how to create a KPI (which is pretty popular on Slideshare with 150+ downloads to date)

The Process Of How KPIs Work from Stuart G Hall (stuartgh)

 


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3 thoughts on “CBA vs ROI (cost benefit analysis vs return on investment)

  1. My pleasure Angie, the info has been really useful to me, and has consistently ranked as my most popular blog post to visitors over the past year!

  2. Thank you for this very informative post, and the Social Media presentation. Very helpful information!

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